Investing is the only possible way to bring financial stability to your life while growing your money. However, any investment tool’s performance is evaluated by how well it satisfies your needs. When considering whether to invest in a fixed deposit or a corporate bond, it’s critical to differentiate between the benefits and drawbacks of both the options. Both the FD vs corporate bonds are fixed-income savings instruments. While the corporate bonds offer larger tax benefits than FDs, despite the fact that FD interest rates are higher.
Fixed deposits and corporate bonds both need a certain amount of money to invest for a fixed period of time. FD interest rates are substantially greater than corporate bond interest rates, but corporate bonds have additional tax advantages.
What is a Fixed Deposit?
Fixed deposit investment options are offered by banks to meet the needs of both the short term as well as the long term investors. Fixed deposits come along with a lot of benefits as well. The best part about investing in fixed deposits is that you will get a guaranteed return on your investment. Moreover, investing in a fixed deposit is tax-free. Apart from being tax free, fixed deposits provide flexibility to investors as they allow them to choose the investment tenure and the investment amount of the FD. Based on your investment, you may be eligible for a loan against your FD. In the event of an emergency, you can close your Fixed Deposit and withdraw the funds right away. Talking about the tax benefits, if you invest for five years in tax-saving fixed deposits, you will be eligible for a number of tax benefits.
FDs are a popular savings instrument that banks offer where an investor invests a lump sum amount of money at a fix rate of interest for a certain period of time. Since it assures a return on the investor’s investment, it is one of the safest investment options available in the market today. Rising inflation has no impact on the returns as the establishment of rate of returns on FDs is done by the Indian government.
What is a Corporate Bond?
Corporate bonds are a form of Debt securities. Both public and private companies issue corporate bonds. There are several types of bonds that companies issue and they are also known as Non-Convertible Debentures (NCDs). Firms and companies raise funds for their operations, future expansions, and growth possibilities. They either use debt or equity to raise funds. Generally companies prefer issuing debt securities since it does not compromise their shareholding structure. Companies generally do not opt for bank loans as they are expensive. Therefore companies raise capital by issuing bonds or debentures, which is comparatively less expensive. There are times when a company puts up its assets as collateral.
When you buy a corporate bond security, it simply means that you are lending your money to that company. Therefore, the company will repay the principal upon maturity. Also, the company pays interest on the borrowing; people know this as the coupon. Generally, a company makes coupon payments twice a year.
Benefits of Investing in a Fixed Deposit
A Fixed deposit is the perfect investment tool for investors with low risk tolerance looking to grow their money in the safest possible way. Although, there are a number of benefits that come along with a FD, here are a few of them:
- Your investment remains unaffected by the market fluctuations.
- Senior citizens can avoid market risks and can profit from high interest rates.
- With features like loans against fixed deposits, you can cover your immediate financial obligations.
- Can help you earn more than a savings account.
- Fixed deposit returns can fulfill a variety of purposes be it financing a vacation or supporting your child’s education.
For Benefits of Investing in a Corporate Bond
Investing in a corporate bond is highly beneficial for those who look to grow their savings along with some tax benefits. Corporate bonds are however, relatively risky as the market fluctuations tend to influence them. However, there are various benefits as well, some of which are as follows:
- Provides capital appreciation which enables you to make substantial gains.
- Returns from these bonds are not subject to tax.
- You can later sell these bonds to another party.
- May or may not have flexible tenures.
- Secured but not insured. In case a bond goes unpaid, you have right over the collateral assets.
What Should You Invest in?
If you are seeking an investment option that offers complete security and confirms returns on investments, a Fixed Deposit is the investment tool for you to start investing. Whereas, Corporate Bonds have higher maturity but are comparatively riskier as the market fluctuations affect the investments here. While on the other hand, you get assurance on your returns without market forces by investing in a fixed deposit. Therefore it is wise to make assured returns on your investments by investing in a fixed deposit.